(e) Estimate (f) Forecast * including Reconstruction and Development Fund

STRENGTHS

Abundant and diversified natural resources (gas, gold, cotton)

Low debt levels and comfortable foreign exchange reserves

Ambitious public investment programme

WEAKNESSES

Poor economic diversification and dependence on commodity prices

Slow pace of reforms

Under-developed banking sector and practice of directed credit

State interventionism and difficult business climate

Risk Assessment

Growth sustained by public investment

In 2016, Uzbekistan is expected to remain as one of the most dynamic economies in the CIS. The five-year public investment programme (2015-2019), aimed at improving industrial plant and infrastructures, is likely to continue to sustain activity, especially in the construction sector. Industrial output (machines, light industry and agri-food) and services (almost 45% of GDP) are also expected to remain buoyant.
As in 2015, the contribution of exports is expected to be constrained by low prices for the main Uzbek export products (gold, gas, cotton, copper) and by the slowdown in external demand.Household consumption is also likely to be less lively. The positive effects, expected at the start of 2016, of the 10% rise in wages, pensions and benefits agreed in September 2015, are expected to be partially offset by the steady fall in expatriates’ remittances linked to the recession in Russia, in conjunction with the fall of the rouble and the return to Uzbekistan of tens of thousands of migrants. Inflation, which is likely to stay fairly high, is also expected to put pressure on the development of real incomes. The controlled tariffs (oil, gas, public services) are expected to continue to rise and the prices of imported goods could rise due to the depreciation of the som.

Appearance of a budget deficit and worsening current account deficit, which is nonetheless still low

In 2016, the government is expected to continue its policy of supporting activity in an effort to offset the consequences of an unfavourable international environment. Wages and social spending are expected to increase more moderately than in previous years, but public investment is set to continue rising. Budget revenues from the export sectors are likely to be constrained by the weakness of commodity prices. At the same time, taxes and duties should continue to fall, contributing to the appearance of a budget deficit. However, the government enjoys substantial leeway thanks to the assets in the Fund for Reconstruction and Development (FRD) (estimated at USD 13 billion in 2014 or about 20% of GDP). Moreover, public debt remains low.

Uzbek exports are expected to continue to be hit by the recession in Russia and the slowdown in China and Kazakhstan. Worsening trade terms with Russia linked to the rouble’s depreciation could continue to put pressure on exports of manufactured goods, while the prices for export products (cotton, gold, copper, gas) are not likely to rebound in the short term. Conversely, higher volumes of gas sold to China are expected to offset the fall in flows to Russia, following Moscow’s decision in early 2015 to reduce its purchases of Uzbek gas. Moreover, the moderation in internal demand could slow imports a little, thus limiting the worsening of the current account balance
Massive foreign exchange reserves (in the order of 16 months of imports) shields the country from financial tensions and should enable the monetary authorities to defend the currency. The central bank can also resort to exchange control measures (obligation to convert export revenues) to manage movements in the som. The competitiveness gap linked to the fall in the Russian rouble and the Kazakh tenge could, however, force the central bank to allow the currency to depreciate in 2016.The underdeveloped banking system is tightly controlled by the State, especially its lending policy, which weakens the quality of its portfolios. However, the sector will be supported by the government in the event of any difficulties.

Latent political tensions and a difficult business climate despite the announced reforms

Islam Karimov, in power since the country became independent, was re-elected in March 2015. The succession process (the president is 77 years old) remains very uncertain. Poverty, unemployment and restrictions on freedom are fertile ground for protests, despite repression and could foster a popular uprising against a backdrop of weakening government. The country is moreover exposed to the rise of radical Islamic movements and has sometimes had trained relations with its neighbours, especially with Kyrgyzstan, which is a potential instability factor. Finally, non-observance of international rules on investor protection, restrictions on access to foreign currency, interference by the public authorities in the economy and high levels of corruption (ranked 186th out of 215 according to the World Bank’s governance indicators), strongly corrode the business climate.